What does the Bank of Canada do?
Well, that is a loaded question. A simplified answer is that it makes sure that Canada’s monetary policy is creating a safe and stable financial system for Canadians. If that already sounds like something out of a boring high school textbook, I get it. The average Canadian doesn’t know, and probably doesn’t need to know, the intricacies of the innerworkings of the Bank of Canada. There are however, a few things that the Bank of Canada does that impacts the average Canadian in their day-to-day life.
Whether you have Facebook friends who are in the financial services industry or a professional who sends you newsletters with updates, you have likely heard the words “overnight interest rate” thrown around. You may not know it, but this rate impacts anyone who has a credit card, line of credit, student loans or mortgage – so basically everyone.
The overnight rate is what financial institutions use to lend money to one another. When the rate that they use changes, they pass that change on to their clients; you. So the Bank of Canada raises the overnight rate, what happens exactly?
Let’s say that the Overnight Rate goes up:
Your mortgage will react differently depending on if you have a fixed or variable mortgage. If you have a fixed mortgage, you won’t see any changes. If you have a variable mortgage, you will likely see an increase in your rate quickly (usually the following month) as your fluctuating interest rate allows lenders to pass any increases directly on to you.
Your credit cards, line of credit, car loans, and any other type of debt that you have will react similarly to your mortgage. If the interest rate on those debts are variable, you will see them go up right away. If they are fixed, you probably won’t see a difference.
What about my savings account?
You may be thinking that if this overnight interest rate rises, the interest paid to you from your savings account must also, right? Unfortunately, this isn’t usually the case so don’t go banking on an increased overnight rate from the Bank of Canada to boost your savings.
If the overnight rate goes down, on the other hand, you will see the amount of interest that you pay on debts decrease, depending on the type of rate you have.
So, make sure you keep an eye out for changes to this number so you know how it impacts you so you can adjust your budget and maintain financial stability.
Still not sure what to do when the overnight rate changes? Contact me for more info!
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Your unique situation merits a unique answer. If your mortgage is up for renewal soon, please get in contact with your mortgage broker and begin discussing your options.